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An entity should disclose amounts and nature of changes in accounting estimates. In addition, it should also disclose changes relating to future periods, unless
impracticable. The definition of “impracticable,” which has been explained for the purposes of “changes in accounting policy,” applies in the case of “changes in
accounting estimates” as well.
CORRECTION OF PRIOR PERIOD ERRORS
Errors can arise in recognition, measurement, presentation, or disclosure of items in financial statements. If financial statements contain either material errors or
intentional immaterial errors that achieve a particular presentation, then they do not comply with IFRS. Misstatements or omissions are “material” if they could, either
individually or cumulatively, influence the decisions of users of financial statements.
Discovery of material errors relating to prior periods shall be corrected by restating comparative figures in the financial statements for the year in which the error is
discovered, unless it is “impracticable” to do so. Again, the strict definition of “impracticable” (as explained previously) applies.
Disclosures in Respect of Correction of Prior Period Errors
With respect to the correction of prior period errors, IAS 8, paragraph 49, requires disclosure of
• The nature of the prior-period error.
• For each period presented, to the extent practicable, the amount of the correction:
• For each financial statement line item affected.
• For entities to which IAS 33 applies, for basic and diluted earnings per share.
• The amount of the correction at the beginning of the earliest prior period presented.
• If retrospective restatement is “impracticable” for a particular prior period, the circumstances that led to the existence of that condition and a description of how
and from when the error has been corrected.
Once disclosed, these disclosures are not to be repeated in financial statements of subsequent periods.
CASE STUDY 4
In its 20X9 annual accounts, Joke included the corrected 20X8 consolidated cash flow figures as the comparative numbers to the 20X9 consolidated cash
flow statement. The 20X9 accounts did not include any reference to the fact that the comparative numbers accompanying the 20X8 cash flow statement
had been corrected. Joke had issued a communication to the market about the changes.
Required
Discuss the implications of the above events.
Solution
The changes to the comparative figures were material errors and should have been adjusted in accordance with IAS 8, paragraph 42, and supported by the
relevant disclosures which would have included disclosure of the nature of the prior period errors. Even if the corrections to the 20X8 cash flow statement
had been adequately communicated to the market through an announcement, further disclosures were necessary in the 20X9 accounts.
IAS 1, paragraphs 14 and 15, state that in virtually all circumstances a fair presentation is achieved by compliance with applicable IFRS. The fact that
relevant information has already been communicated to the market does not release Joke from the obligation to apply IFRS when preparing its annual
accounts. A press announcement cannot stand in the place of information that is required to be disclosed, and audited, within a set of annual financial
statements.
CASE STUDY 5
Facts
1. The internal auditor of Vigilant Inc. noticed in 20X9 that in 20X8 the entity had omitted to record in its books of accounts an amortization expense
amounting to $30,000 relating to an intangible asset.
2. An extract from the statement of comprehensive income for the years ended December 31, 20X8 and 20X9, before correction of the error follows:
20X9 20X8
Gross profit $300,000 $345,000